These 4 metrics indicate that Autoline Industries (NSE:AUTOIND) is using debt a lot
David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies Autoline Industries Limited (NSE:AUTOIND) uses debt. But does this debt worry shareholders?
Why is debt risky?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
See our latest analysis for Autoline Industries
What is Autoline Industries net debt?
As you can see below, at the end of September 2021, Autoline Industries had ₹1.30 billion in debt, up from ₹1.23 billion a year ago. Click on the image for more details. However, he also had ₹45.5 million in cash, and hence his net debt is ₹1.26 billion.
A look at the responsibilities of Autoline Industries
According to the latest published balance sheet, Autoline Industries had liabilities of ₹2.86 billion due within 12 months and liabilities of ₹352.3 million due beyond 12 months. In return, he had ₹45.5 million in cash and ₹732.0 million in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by ₹2.44 billion.
This deficit is sizable compared to its market capitalization of ₹2.89 billion, so it suggests shareholders to monitor Autoline Industries’ use of debt. If its lenders asked it to shore up its balance sheet, shareholders would likely face significant dilution.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
Low interest coverage of 0.20 times and an extremely high net debt to EBITDA ratio of 5.0 shook our confidence in Autoline Industries like a punch in the gut. This means that we would consider him to be heavily indebted. A redeeming factor for Autoline Industries is that it turned last year’s EBIT loss into a gain of ₹54 million, in the last twelve months. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; because Autoline Industries will need revenue to repay this debt. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. It is therefore important to check how much of its earnings before interest and taxes (EBIT) converts into actual free cash flow. Over the past year, Autoline Industries has burned through a lot of cash. While this may be the result of spending for growth, it makes debt much riskier.
Our point of view
To be frank, Autoline Industries’ interest coverage and history of converting EBIT to free cash flow makes us rather uncomfortable with its level of leverage. That said, its ability to grow its EBIT is not such a concern. Overall, it seems to us that Autoline Industries’ balance sheet is really a risk for the company. We are therefore almost as wary of this stock as a hungry kitten of falling into its owner’s fish pond: once bitten, twice shy, as they say. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. Know that Autoline Industries presents 4 warning signs in our investment analysis , and 1 of them should not be ignored…
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.